Secured loans differ to personal loans, in that they are secured against a property as opposed to your personal credit score. You can often borrow much more than you would be able to with a personal loan, but the terms of your agreement will be dependent upon three things:
- The value of your property
- Your financial circumstances
- Your ability to repay the loan
It's important that you fully consider the risks involved for yourself, as if you have continued difficulty making the repayments you could end up losing the property it was secured against.
Benefits of secured loans
Taking out a secured loan will give you much more lending power, assuming that you have a property or asset of greater or equal value to the loan, with which you can secure the loan against. Personal loans tend to peak at around £25,000, whereas with a secured loan, you could borrow up to £125,000. Secured loans are also based on a fixed interest rate, meaning that the repayment amounts remain constant, making it easier for you to manage.
If you've had problems securing a personal loan, you may look to take out a secured loan against your property as an alternative. With the security of your home on the line, the risk factor of lending you money is reduced, and it's likely that you'll be able to secure the funds you need. Because of this they are also a good option for the recently self employed, or anyone else who would struggle to secure a personal loan.
Due to the vast sums which can be borrowed, you'll also be able to spread the payments out over a longer period than you could with a personal loan, with many providers allowing borrowing periods of up to twenty five years.
You can also expect the interest rates to be generally lower than those of unsecured loans, with the headline rates often starting at around 5%.
Disadvantages of Secured Loans
Even though lenders advertise that you can borrow £100,000 plus, the amount you can actually borrow will depend upon a number of things such as property value, current financial situation and credit history. As a result you may not be able to borrow the full amount you need. The interest rate (APR) will also vary depending on your circumstance, meaning you might not be eligible for the 5% rate seen in the advert which drew you in (by law, providers are only obliged to advertise rates which would be available for 51% of applicants).
The obvious caveat, is that of your property being secured against the loan. Despite our best laid plans, circumstances can arise from time-to-time to ruin them. If the worst were to happen, and you were unable to make the repayments, your property could be seized, effectively leaving you homeless. As such it's always necessary to make a good assessment of the risks, and even think about temporary contingencies plans to make the repayments if necessary. Is there a relative you can turn to for help, - or perhaps you have other assets, jewellery etc. which you'd be happy to sell to bridge the gap, until you get your finances straightened out once more.
Alternatives to secured loans
A better option which might be available to you, is that of re-mortgaging your home, as interest rates are generally lower than secured loans. It could be that you'll end up paying interest on the sum for the remainder of your mortgage period, but on the other-hand; this also allows you to make the repayments more manageable by spreading them out over a longer period.
If you just require to borrow a small amount - a few thousand say – you'll be interested to know that some credit card companies offer 0% interest on purchases for 18 months, which will work out far better than any loan you can find, assuming that you can pay of the balance within a year and half.Image: © Photodynamx | Dreamstime.com